American Capital Stays Neutral - Analyst Blog
17 Mai 2011 - 6:36PM
Zacks
We maintain our Neutral rating on American Capital
Agency Corp. (AGNC), a leading real estate investment
trust (REIT) that focuses on investments in mortgage pass-through
securities and collateralized mortgage obligations (CMOs), as we
anticipate it to perform in line with the broader market.
American Capital invests only in fixed-rate agency securities
where payments are guaranteed by the U.S. government or
government-owned entities, such as Fannie Mae
(FNMA), Freddie Mac (FMCC) and Ginnie Mae.
Specifically, American Capital invests in FMCC Gold certificates,
FNMA certificates, and Ginnie Mae certificates.
With the government takeover of FNMA and FHLMC, American
Capital’s securities now have an explicit government guarantee,
which makes it a much more attractive prospect for investors.
Additionally, the company’s portfolio of government-backed assets
is relatively liquid and credit risk is limited.
Furthermore, American Capital purchases payer swaptions to
protect against lower interest rates that might lead to early
prepayment of the mortgages. This measure ultimately facilitates
the company to continue making money by collecting premium and
ensures a steady revenue stream.
In addition, American Capital pays a steady dividend and has a
unique distinction of being one of only a few companies to have
increased its dividend during the economic downturn. The company
declared a first quarter dividend of $1.40 per share, which equates
to a total of $499.2 million in dividends or $14.66 per share since
its initial public offering in May 2008.
However, the residential mortgage market in the U.S. has
experienced defaults, credit losses and liquidity concerns in the
recent past, which have reduced financial industry capital, leading
to reduced liquidity for some institutions. These factors have
impacted investor perception of the risk associated with real
estate related assets, including agency securities and other
high-quality RMBS (residential mortgage backed securities)
assets.
As a result, values for RMBS assets, including some agency
securities and other AAA-rated RMBS assets, have experienced a
certain amount of volatility. Increased volatility and
deterioration in the broader residential mortgage and RMBS markets
may adversely affect the performance of American Capital in the
future.
In addition, any decline in the value of agency securities might
cause its lenders to initiate ‘margin calls,’ forcing it to pledge
additional collateral. Consequently, the potential threat of a
margin call could force American Capital to sell (either directly
or through a foreclosure) its agency securities, which in turn
might reduce its long-term profitability.
AMER CAP AGENCY (AGNC): Free Stock Analysis Report
FREDDIE MAC (FMCC): Free Stock Analysis Report
FANNIE MAE (FNMA): Free Stock Analysis Report
Zacks Investment Research
AGNC Investment (NASDAQ:AGNC)
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